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THE IMPACT OF EXCHANGE RATE FLUCTUATION ON THE
NIGERIA ECONOMIC GROWTH (1980 – 2010)
ABSTRACT
This
research work is centred on the impact of exchange rate fluctuation on the
Nigeria’s economic growth with special emphasis on purchasing power of the
average Nigeria and the level of international trade transaction. Without
exchange rate the exchange of goods and services among trading partners will be
faced with a lot of problems, which may virtually narrow it down to trade by
barter. This exchange also is used to determine the level of output growth of
the country. Hence, the rate at which exchange fluctuates calls for a lot of attention.
However, with already existing exchange rate policies, a constant exchange rate
has not been attained. The rate by which exchange rate fluctuates brings about
uncertainty in the trade transaction, and also the rate of naira has been
unleashed and continues to depreciate. This has resulted to declines in
standard of living of the population increase in costs of production (this is
because most of the raw materials needed by industries are usually imported),
which resulted in cost-push inflation. We made use of many tests, like the
t-statistics table, f-statistic table and the chi-square etc. When we found out
real exchange rate has a positive effect on the GDP.
CHAPTER ONE
1.0
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
the
exchange rate is perhaps one of the most widely discussed topic in Nigeria
today. This is not surprising given it’s macro-economic importance especially
in a highly import dependent economy as Nigeria (Olisadebe, 1995:20).
Macroeconomic policy formulation is a process by which the agencies responsible
for the conduct of economic policies manipulate a set of instrumental variables
in order to achieve some desire objectives.
In
Nigeria these objectives include achievements of domestic price stability, balance
of payment equilibrium, efficiency, equitable distribution of income and
economic growth and development.
Economic
growth refers to the continuous increase in a country’s national income or the
total volume of goods and services, a good
indicator
of economic growth is the increase in Gross National Product (GNP) over a long
period of time. Economic development on the overhead implies both structural
and functional transformation of all the economic indexes from a low to a high
state (Siyan, 2000:150) one of the macro –economic variables of importance is
the exchange rate policy country.
Exchange
rate policy involves choosing where foreign transaction will take place
(Obadan, 1996). Exchange rate policy is therefore a component of macroeconomic
management policies the monetary authorities in any given economy uses to
achieve internal balance in medium run. Specifically internal balance mean the
level of economic activity that is consistent with the satisfactory control of
inflation. On the contrary, external or sustainable current account deficit
financed on lasting basis expected capital inflow.
It is
important to know that economic objectives are usually the main consideration
in determining the exchange control. For instance from 1982 – 1983, the
Nigerian currency was pegged to the British pound sterling on a 1.1 ration.
Before then, the Nigerian naira has been devalued by 10%. Apart from this
policy measures discussed above, the Central Bank of Nigeria (CBN) applied the
basket of currencies approach from 1979 as the guide in determining the
exchange rate was determined by the relative strength of the currencies of the
country’s trading partner and the volume of trade with such countries.
Specifically weights were attached to these countries with the American dollars
and British pound sterling on the exchange rate mechanism (CBN, 1994). One of
the objectives of the various macro– economic policies adopted under the
structural adjustment programme (SPA) in July, 1986 was to establish a
realistic and sustainable exchange rate for the naira, this policy was
recommended in 1986 by the International Monetary
Fund (IMF). On exchange mechanism and was adopted in 1986.
The key
element of structural adjustment programme (SAP) was the free market
determination of the naira exchange rate through an auction system.
This was
the beginning of the unstable exchange rate; the government had to establish
the foreign exchange market (FEM) to stabilize the exchange rate depending on
the state of balance of payments, the rate of inflation, Domestic liquidity and
employment. Between 1986 and 2003, the federal Government experimented with
different exchange rate policies without allowing any of them to make a
remarkable impact in the economy before it was changed. This inconsistency in
policies and lack of continuity in exchange rate policies aggregated unstable
nature of the naira rate. (Gbosi, 1994:70).
1.2
STATEMENT OF THE PROBLEM
The
exchange rate of the naira was relatively stable between 1973 and 1979 during
the oil boom er (regulatory require). This was also the situation prior to 1990
when agricultural products accounted for more than 70% of the nation’s gross
domestic products (GDP) (Ewa,
2011:78).
However,
as a result of the development in the petroleum oil sector, in 1970’s the share
of agriculture in total exports declined significantly while that of oil
increased. However, from 1981 the world oil market started to deteriorate and
with it’s economic crises emerged in Nigeria because of the country’s
dependence on oil sales for her export earnings. To underline the importance of
oil export to Nigerian economy, the gross national product (GNP) fell from $76
billion in 1980 to $40 billion in 1996, a number of economic growth
became negative as result of the
adoption of structural adjustment programme (SAP).
This major problem which this
study is designed to solve is whether the exchange rate has any bearing on
Nigerians economic growth an d development. While some Economist dispute the
ability of change in the real exchange rate to improve the trade balance of
developing countries (Hinkle, 1999:21) because of elasticity of their low
export, others believe that structural policies could however change the
long-term trends in the terms of trade and the prospects for export led growth.
Instabilities of the foreign exchange rate is also a problem to the economy.
1.3
OBJECTIVE OF THE STUDY
the objective of the study is to
show the impact of exchange rate on gross domestic product and hence how this
effect the growth and
development of the Nigerian
economy identifying the impacts of the unstable exchange rate of the naira on
these major macro-economic variables would however, depend on the conditions
prevailing in the economy at a given time.
The main
objectives of exchange rate policy in Nigeria are:
(1)
To
present the value of the domestic currency.
(2)
To
maintain favourable external reserve position.
(3)
To
ensure price stability and price stability and price levels which are
consistent with those of our trading partners.
(4)
To have
a realistic exchange rate which will remove the existing distortions and
distortions and disequilibrium in the external sector of the economy.
(5)
To have
a stable and realistic exchange rate that is in consonance with other
macro-economic fundamentals.
1.4 FORMULATION OF THE RESEARCH
HYPOTHESIS
Based on
the objectives of the study, the following hypothesis were formulated.
Ho:
Exchange rate fluctuation has no significant impact on Nigeria economic growth
and development.
Hi:
Exchange rate fluctuation has a significant impact on Nigerians economic growth
and development.
1.5 SIGNIFICANCE OF THE STUDY.
The
significance of this research work lies in the fact that if the cause of the
unstable exchange rate of the naira is identified and corrected, the economy
will rapidly grow and develop into an advance one. This is so because if the
unstable exchange rate of naira is proved to be affecting the macro- economy
major variables badly, including Real
exchange
rate, Real interest rate, inflation rate, gross domestic product and trade
openess of the country, attempts should be made to stabilize the exchange rate.
This is because these variables are gauge for the measurement of growth and
development of any economy. Importantly, this study would help the government
and the central bank of Nigeria (CBN) to identify the strength and weakness of
each foreign exchange system and hence adopt the policy that suits the economy
best. This will definitely enhance growth and development of the economy, the
study will also serve as a guide to future researchers on this subject.
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